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Philip Morris (PM) Benefits From IQOS Growth & Strong Pricing

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The tobacco industry has long been grappling with dwindling cigarette sales volumes, thanks to consumers’ rising health consciousness and regulatory headwinds. Amid such a scenario, several tobacco companies including Philip Morris International Inc. PM have managed to stay afloat on rising popularity of reduced risk products (“RRPs”). In fact, Philip Morris is among the industry pioneers in driving the shift from cigarettes to low-risk alternatives. Markedly, Philip Morris’ IQOS is one of the leading RRPs in the industry. Apart from this, efficient pricing strategies have been fundamental to the company’s top-line growth. Let’s take a closer look.

RRPs Are a Key Growth Catalyst

RRPs, known to be the next-generation tobacco products, have been gaining popularity owing to their less detrimental impacts on health. Consumers are inclining toward RRPs in a bid to quit cigarettes. Notably, Philip Morris’ IQOS was launched in the United States in 2019, through a commercial deal with Altria Group, Inc. MO that was approved by the FDA. In December 2020, IQOS 3 received authorization from the FDA for sale in the United States. The new device incorporates a number of technological improvements like enhanced battery life and quicker recharge.

We note that total users of IQOS as of the end of first-quarter 2021 were estimated to be about 19.1 million, including nearly 14 million users who have shifted from smoking to IQOS. Strong growth in IQOS boosted revenues in the RRPs category, which increased 36.5% to $2,122 million in the first quarter. Moreover, heated tobacco unit shipment volumes of 21.7 billion units rose 29.9% year over year. The company expects its heated tobacco category to keep gaining from the growing popularity and acceptance of IQOS devices. Therefore, it is committed toward expanding these products to more markets. We note that other tobacco companies such as Turning Point Brands, Inc. TPB and British American Tobacco p.l.c. BTI have been expanding their offerings in the low-risk tobacco space.

Strong Pricing Continues to Aid

Strong pricing for tobacco products has been a significant upside for Philip Morris. This has been boosting revenues and adjusted operating income despite unfavorable tax environment and declining cigarette volumes. Though higher pricing might lead to possible decline in cigarette consumption, it is seen that smokers tend to absorb price increases owing to the addictive quality of cigarettes. Evidently, higher pricing variance was an upside to the company’s performance across most regions during first-quarter 2021. Favorable combustible pricing aided the company’s adjusted operating income margin, which rose 18.5% (on an organic basis) in the quarter. Continued pricing power is likely to keep supporting the company’s performance in the forthcoming periods.

Shares of this Zacks Rank #3 (Hold) company have gained 12.6% in the past three months compared with the industry’s rise of 11.8%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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